Overconfidence in Investing

Where did “mansplaining” come from?

Mansplaining is a pejorative term meaning “to comment on or explain something to a woman in a condescending, overconfident, and often inaccurate or oversimplified manner.” Author Rebecca Solnit ascribed the phenomenon to a combination of “overconfidence and cluelessness.”

Here’s Solnit explaining the birth of mansplaining, firsthand.

I’m not here to dunk on men or be a white knight. But the fact of “honest overconfidence” explains a lot about personal finance and investing.

A group of business professors (mainly at Columbia University) published a critical paper on the subject called Men’s Honest Overconfidence May Lead to Male Domination in the C–Suite. That term – “honest overconfidence” – explains how men and women, on average, view themselves. Keep that “on average” qualifier in mind. It might not apply to you specifically.

But whether we’re talking about sports, education, employment…anything…men tend to overestimate their abilities and women tend to underestimate their abilities. It’s called “honest” because the Columbia study found men honestly believe in their heightened ability and women honestly believe they lack ability.

The study and the aforementioned podcast dig into why this is the case. It’s worth understanding. But I want to share a few ideas and anecdotes on my personal experience with confidence, and detrimental in can be to your finances.

One of my big goals with The Best Interest is arming you with the right balance of confidence and humility. It takes both attributes to say, “The stock market is a great investment…but we might not see it for 5, 8, 10+ years.” That’s infinitely better than the more typical opinions of:

  • “The stock market is easy. Come learn my system of doubling my money every month.”
  • “The stock market is a Ponzi scheme and will soon crash to zero.”

It takes confidence to take action. Investing is a risk, and risk is scary. But overconfidence leads to too much action and screws it all up. Two great articles on the topic are:

A big part of my job is having financial conversations in the Rochester community. I teach financial literacy courses, I work with clients at my firm, and I chat with prospective clients to see if my firm is the right fit for them.

And the Columbia researchers are right. At least anecdotally.

Genuine curiosity and humble questioning are always welcome. That’s the best way to be. But what about the full-time plumbers who watch my uncle Jim Cramer three times a week and comprehend more than the 10+ CFPs and CFAs I work with? They might be the Good Will Hunting of investing, but I’m not betting on it. That type of overconfidence comes from men 10x more than women.

In my financial literacy class, there’s one lesson where I start by asking, “What’s 10% of $1000?” It’s not a trick question. It’s an easy question. The answer is $100. But men answer that question 10x more than women. Why? The combination of math and the public spotlight seems to trigger underconfidence.

Perhaps ego is to blame? Self-attribution bias is a likely culprit of overconfidence. People credit their own talent and abilities for past successes while blaming their failures on bad luck. Good? I’m skilled. Bad? I’m unlucky. When investors do well, their confidence grows. When they fail, they blame it on bad luck without downgrading their confidence.

Of course, the challenge here is that we’re talking about honest overconfidence and underconfidence. I can’t write, “Hey dudes – stop acting so overconfident! Hey ladies, step up and be confident!” because they’d respond, “I’m being honest and acting precisely as confident as I should!”

Instead, the takeaways need to be:

  • You probably know more or less than you assume. If you’re a guy, odds are you know less than you think. Women, you know more than you think.
  • But you’re a sample size of one. These general findings might not apply to you.
  • However, the sample size of your personal network is huge, and these rules certainly apply to that many people. On average, the men in your life are overconfident and the women are underconfident. Arm yourself with that knowledge moving forward.
  • In some fields, overconfidence helps. The Columbia researchers, for example, found it led to more promotions at work, i.e. “fake it ’til you make it.” But in investing, overconfidence is a killer.
  • Underconfidence in investing, at least by my standards, isn’t great either. The underconfident investor sells their portfolio at the wrong time, or opts to never invest in the first place. No bueno.
  • Instead, the “perfectly confident” investor knows how diversification, dollar cost averaging, and staying the course will help them in the long run…but doesn’t try to time the short run.

That ideal confidence comes from education. An investment in knowledge pays the best interest.

Thank you for reading! If you enjoyed this article, join 6000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

Want to learn more about The Best Interest’s back story? Read here.

If you prefer to listen, check out The Best Interest Podcast.